SAO PAULO: Brazil's inflation will remain under pressure in the beginning of this year, perhaps until February, but key members of President Dilma Rousseff's economic team estimate that prices will then start to converge in a "more linear" manner to the center of a government target.
Such a forecast is based on the positive impact of a large grains harvest due in the next few months, a source on the president's economic team said late on Friday.
"The central scenario we're working with includes a more linear decline in inflation," the source told Reuters on condition of anonymity. "We are supposed to have a very good harvest, and food prices will likely help lower inflation."
Brazil's central bank last week held the base Selic rate at an all-time low of 7.25 percent for the second consecutive time, reiterating that the best strategy to rein in inflation is to keep rates stable for a "prolonged period."
In their post-meeting statement, policymakers said inflation would remain under pressure "in the short-term" but added that economic activity was also disappointing. Investors took this to mean policymakers expected tame economic activity to help ease inflationary pressure.
They also repeated that price indexes would converge to the government target but removed the expression "even in a non-linear fashion" they had been using in the past few months. Investors were not sure whether this was a message from the central bank that it saw inflation as having peaked or whether it expected prices to continue to rise.
Many investors focused on the central bank's acknowledgement of inflation concerns to drive Brazil's local rates sharply higher last week.
The interest-rate contract maturing in Jan. 2015 jumped over 10 basis points since the central bank released its post-meeting statement on Wednesday, pricing in some bets that the Selic could go up sooner than expected.
The source stressed, however, that the economy's performance is also disappointing.
"The recovery in economic activity will come for sure, but it will be much slower than expected," the source said, adding that this is another factor that will help bring inflation to the target.
Brazil's consumer inflation closed 2012 at 5.84 percent, well above the center of a government target of 4.5 percent, but still within a tolerance range of 2 percentage points.
Prices continued to gain traction in the beginning of 2013 as items such as food and personal expenses became more expensive.
In the central bank's latest inflation report, policymakers estimated consumer inflation would slow down to 4.8 percent this year, thanks in part to a government push to lower energy bills.
But the document, published by the central bank every quarter, did not take into account an expected increase in gasoline prices this year.
FALSE HOPES?
Even as Brazil's inflation outlook seems to be approaching an inflexion point towards a more benign trend, the source was careful to note that unforeseen supply shocks could still be a problem.
In the beginning of 2012, the source noted, an unexpected rise in commodity prices completely changed Brazil's inflation outlook, which seemed reasonably benign at the beginning of the year.
"We had supply shocks in 2012, especially in the agricultural sector. We may have other shocks now, we never know."
The international scenario also seems to be better right now than it was in early 2012, but it is still too early to tell, said the source.
"Is this a false positive? We don't know. We need to wait some more."
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